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Biggest plus: Adding some "certainty" to the lending market

Michael Lea, director, The Corky McMillin Center for Real Estate at San Diego State University

This settlement is a case of too little, too late. But the silver lining might be the lifting of the uncertainty that’s been hanging over mortgage lenders.

A lot of lending activity has been held up over the past year or two, for fear that regulators and lawyers will further restrict what the lenders are doing, resulting in penalties or repayments.

This settlement reduces some of those uncertainties and takes some of the legal strings off the lenders, meaning they have to less to worry about from future lawsuits. To the extent that it makes them more willing to extend loans, it will benefit the market.

It would be great to have a global settlement that says ‘OK, you’ve paid your penalties. Now get on with doing business.’ But that’s not what this is. It’s only partial relief, leaving plenty of room for future mischief.

In the meantime, one of the big questions about this settlement is: Who gets the benefits?

I’m not sure what good it does to provide payments to people who were foreclosed upon, especially since the vast majority of these homes were going into foreclosure anyway. I guess the regulators and politicians wanted to look like they were doing something and this was the best they could come up with.

The banks, brokers and borrowers all were partially at fault in this. There’s no good way to separate this out and decide who did what to whom. This settlement reflects that the banks did do things that got us into this mess, although it involved a lot more lenders than just these five. They just happened to be the biggest players.

The idea of reducing principal on underwater homes is good in the sense that maybe it might reduce the number of distressed sales hitting the market. But this reduction might be too little to have a major effect. Not every underwater homeowner will get a benefit from this and for those who do benefit, the amount might be so small that it still won’t keep them from going into default and foreclosure.

What’s a little unusual about all this is we’re asking the big banks to reduce the principal owed on some homes, but Fannie Mae and Freddie Mac have so far refused to do any principal reductions. If mortgage reductions are good for the market, why shouldn’t Fannie and Freddie do it? Maybe it has to do with the difference between taxpayer costs and shareholder costs.

Biggest minus: Punishing and rewarding the wrong people

Mark Riedy

Mark Riedy, executive director, Burnham-Moores Center for Real Estate University of San Diego

This is a win-lose situation where some of the winners don’t deserve to win and some of the losers weren’t necessarily the actual perpetrators.

I’m not sure what it accomplishes in terms of punishing anybody. The people who wrote most of these mortgages are long gone. The regulators who were asleep at the switch and did nothing to stop this get off totally free, as if it wasn’t their fault. If they had been doing their job, we wouldn’t have had this problem.

Most of the banks involved in the settlement weren’t the ones who wrote the loans. Bank of America is in it because of loans written by Countrywide. Wells Fargo is in it because of loans written by Wachovia. The settlement will hurt them a bit, although maybe not that much, because they have set up reserves for this for a while.

Some borrowers have legitimate claims that they were misled or defrauded into taking out faulty loans. I don’t disagree that many people were legitimately aggrieved. I fully support people who were aggrieved getting some compensation. But how do you separate them from the people who lied to get loans they could not afford or who were gaming the housing market like gamblers in Las Vegas? It’s impossible to sort it out.

As a result, you give money to some people who don’t deserve it, subsidizing them for bets that went bad. And the people who were actually wronged in the process will get what amounts to little more than a monthly mortgage payment, which they’ll probably put into paying other bills.

The settlement also includes a reduction on the principal amount on loans for borrowers whose homes are underwater, (averaging around $20,000 per person based on government estimates). But why do they deserve that more than I do, just because their home is underwater? Why do they deserve it more than their neighbors?

And in the end, what good will it do? If you take that same money and spread it over a 30-year mortgage, it will have no impact on the mortgage payments.

Is the public a winner? I don’t think so. The horse is already out of the barn and we’re reacting way after the crisis has occurred.

I would feel a lot better about this settlement if they just took all the money and used it to pay down the government deficit or if they put it into programs that really created jobs, such as filling every pothole in the state.